This week, I had a lot of disparate thoughts that I wasn’t quite ready to make a whole post out of. So, I’m taking a break from the norm and am just posting some bullets…

• Gratitude. In the spirit of giving thanks, did you know that when you feel gratitude, you can’t feel anger or sadness simultaneously? Here’s a fascinating thread, including some advice on counteracting the #1 relationship killer – contempt.

• New Home Build. Just in time to beat the freeze, our basement is dug, and footings are poured. With any luck, we hope to move in August 2024! While our architectural plans are locked in, there’s still time to mix things up on plumbing, heating, electrical, appliance selections, etc. Open call if you have any creative ideas – I’d love to hear them. Just hit reply to this email, and I'll get it!

• Hospitality & Decluttering. One of our family mantras is “Experiences over Objects.” And yet, we’ve made some significant purchases recently with our vacation property and new home build. It’s probably partially a justification, but the big selling point for me to proceed with both was a desire to extend hospitality to family, friends, and beyond – and, therefore, use them as tools to create memories. It’s been fun to invite others to vacation with us. And I’m looking forward to hosting dinners and guests more often at our new home. To facilitate that, my biggest goal in the move is decluttering and finding a strategy we can stick to for a tidy house. Other than reading The Life-Changing Magic of Tidying Up by Marie Kondo, what methods have worked for you in decluttering and sticking with it?

• OpenAI. Last weekend and early last week, I was way too caught up in the OpenAI board/CEO drama. If you have no idea what I’m talking about, congratulations. I’ll spare you my extensive pontifications on the whole matter. All I’ll say is that for a company that’s all about our AI future, how things played out with the board is quite the study of human nature and relationships. I’m sure it will be studied for years to come.

• Mid-Life Crisis Reading. Thanks to a recommendation from my friend Jesse, I’m currently listening to What Got You Here Won’t Get You There: How Successful People Become Even More Successful. I’m only ~35% way through it, but I am far enough to recommend it to others – especially anyone over 40. Like it or not, I’ve begun to accept that I’m decidedly middle-aged. My running joke post-acquisition has been that I’m trying to figure out what I want to be when I grow up. Two years later, the joke has gotten old. Especially to me! The book gives a lot of good frameworks and strategies for thinking about your next stage of impact and how that will probably look a lot different than it did before – hence the title.

• Better Written Communication. Thanks to Michelle for re-posting this 1 minute guide to better-written communication.

• Development & AI. This weekend, I wanted to code something really small. For someone who “used to code,” it probably would’ve taken me 20 minutes to look up all the proper references and ensure I got everything right. Instead, I asked ChatGPT and had a working code in 1 minute. I’ve shared a similar story before; maybe you've heard others. But have you seen the one where the guy draws a breakout game using "make real" (demo + code), and it’s working within a minute? A lot of people are worried about job losses. Still, honestly, I think this will follow every industrial revolution that’s preceded… It may change the style of work many of us do, but increased productivity will mean increased opportunity for all.

• Robotic Coffee. I recently got a chance to experience a new fast coffee pickup experience from Octane Coffee. I love what they’re up to. They had a news story go viral a couple weeks back. Imagine never having to wait in a long drive-thru line again.

• Gift Guide. A podcast I listen to – All the Hacks – just published their 2023 Holiday Gift Guide. It had several interesting ideas, some of which I’m adding to my own list. :)

Photo by Element5 Digital on Unsplash

Those who aren’t active in the residential real estate industry may have missed some big news over the last few weeks. It will likely become a watershed moment that disrupts residential real estate transactions. I’ll talk more about what happened in a minute, but first, let me give some background on why I believe this is such a big deal.

HomeSpotter was never a disruptor. For various reasons, I chose a path where we would partner with the real estate industry as it existed. Our primary customers were (and still are) mid-to-large-sized real estate brokerages and franchisors and the multiple listing services (MLSs) that serviced them. Eventually, before we were acquired, we also started selling to real estate agents.

When I started raising money for HomeSpotter, potential investors often asked me: “Isn’t residential real estate just going to get disrupted? And if it does, what does that mean for you?”

As I became familiar with the industry, a few things seemed obvious. Eventual disruption of the industry was inevitable. And… at least up until 2018, I could confidently say that it seemed apparent that disruption was at least 5-10 years out. However, around 2020, my tune started to change. I could foresee the potential disruption within a 5-year time horizon.

I would explain to investors that there is a strange quirk in the residential real estate market. In a nutshell, sellers of properties pay both the seller’s and buyer’s agent commissions. In a somewhat typical case, a seller might pay their agent 6% to sell their house. Assuming a buyer uses their own agent to buy the house, the seller’s agent pays the cooperating agent a pre-agreed upon commission (e.g., this could be any number a seller’s agent chose for a given listing, but market norms were often +/- 2.7%). This is the primary business reason a multiple listing service exists. For seller’s agents to post listings with a stated buyer’s agent commission. Notably, this behavior only exists in the US and Canada and is also specific to residential real estate – commercial real estate works much differently.

This coupling of how buyer and seller agents are paid made real disruption difficult. Most listings are on the MLS, and any listing not on the MLS is at a competitive disadvantage. To post a listing on the MLS, a member agent was typically required to post a buyer’s agent commission. Listing agents knew they’d need to post a competitive commission with what the market was paying, or other agents may opt not to show their property. So a disruptor looking to reduce commissions for sellers would have to either make a compelling case about how they can earn a seller just as much money by not posting on the MLS or they would need to post on the MLS and absorb the market norm buyer’s agent commission. Similarly, since buyers never felt like they were paying their buyer’s agent, they had little incentive to choose a disruptor on the buy side.

This is why I have always advised people to get their own buyer’s agent when buying properties. The seller’s agent will collect the full commission from the seller (~6%) either way. It is, therefore, better to get an agent that fully represents your interests as a buyer than to go directly to the seller’s agent, who will never solely have your interests in mind.

So, why did my tune start to change around 2020? Two reasons.

First, I saw the startup Opendoor start to gain a modest amount of market traction. Opendoor provided a prime example of how a disruptive startup could decouple the otherwise tightly coupled real estate transaction. Opendoor allowed consumers to sell their houses without the hassle of many showings or the unknown timing of knowing when a buyer would arrive. Opendoor offered a price to buy a property, often within an hour of the request, and could close in as little as a week’s time. No agents were required for this. While this was a meaningful disruption on the sell side, it also alluded to a path for disrupting the buy side.

In some cases, Opendoor could sell its listings to buyers without involving a buyer’s agent. It had the option to decide when to use the MLS or not.

The second reason my tune started to change was that a series of class action lawsuits had begun to be filed in late 2019 – known simply as Moehrl v. NAR and Sitzer/Burnett. Both cases earned class-action status and made similar allegations. They allege that brokerages and the National Association of REALTORs (NAR) conspired to inflate commissions to sellers by requiring sellers to pay buyer’s agents commissions. I lacked the legal expertise to know where these cases would go on their own, but the fact that there were two and likely more lawsuits to come meant there were legal reasons on the horizon that there might be a forced decoupling of how buyers’ and sellers’ agents are paid.

Fast forward to October 31, 2023. Deliberations in the Sitzer/Burnett trial had just concluded. A jury took less than a couple hours to deliberate and find NAR and the brokerages guilty of conspiring to inflate commissions. It awarded damages of $1.78 billion (likely to be automatically trebled due to antitrust law).

Since then, additional copycat lawsuits (some with a much broader scope) have been filed. And the Moehrl lawsuit is still pending.

It’s still plausible the Sitzer/Burnett award could be reduced or that a different outcome could be reached on appeal. But the tides have shifted. A legal outcome that makes sellers paying buyers’ agents at least an optional thing seems increasingly inevitable.

So, what’s likely from here? It’s hard to say as much is still up in the air, so I hesitate to pontificate too much.

But the residential real estate market in the US may look more like it does internationally. In most international transactions, commissions are closer to ~3% than ~6%. Typically, there is only one agent involved – the listing agent.

Fewer listings may be posted on MLSs, as the primary motivating factor for a listing agent is to advertise to buyer’s agents what they’ll pay them to bring a buyer.

If inventory on MLSs decreases, the search process may eventually become more complicated for consumers. When we were looking for properties in Puerto Rico, I mentioned that you had to triangulate from at least three different sources to find listings. That feels increasingly inevitable in the US. You might envision a future state where some listings never go to the MLS (and therefore don’t make it to many websites that rely on the MLSs). Those listings are on a limited number of other sites. This will, in turn, likely increase the power of a few small players like Zillow and others. Right now, no one pays to list a property on Zillow. However, paid listings on sites are the norm in countries like Australia.

Similarly, it may become even more problematic for residential real estate tech startups focused on the search process to get started. I doubt Zillow will license its listings to others. And suppose MLSs increasingly have gaps in the coverage of listings. In that case, it’ll be hard for those tech startups to compete with a sufficiently good experience.

What’s interesting in all of this is that the average real estate agent only makes, on average, $50,000/year. And I’ve always said it’s substantially more work to be a buyer’s agent than a seller’s agent. As a seller’s agent, your scope of work is somewhat finite. List the property on the MLS and make sure buyers can find it. Some seller’s agents go above and beyond that, but at least expectations are straightforward. However, as a buyer’s agent, especially in a hot market, you might take your client to dozens of properties, make multiple offers, and never close a transaction that results in a commission.

If buyers have to pay their agent directly to help them buy a property, how many will opt to do so? Maybe if the service can be part of the financing cost, it’ll remain commonplace. But if not? It seems unlikely that most buyers will want to pay on a percentage basis. Maybe fee for service (e.g., hourly) will become a more common thing with buyer’s agents.

There is much yet to shake out in the months and years ahead. But one thing is sure to me – meaningful change in real estate is on the horizon.

This Week’s Quick Hits

• More updates to come soon on our home build process. For now, I don’t want to jinx anything.

• For those of you in Minnesota, hope you’re enjoying the unseasonably warm day!

Photo by Shefali Lincoln on Unsplash

I’ve founded numerous software businesses over nearly 30 years now. If I’m counting right, HomeSpotter’s first product in the market was also the seventh software product I created and would go on to commercialize. And that’s skipping over some things I built for fun with no intent to commercialize, some things I made for others while employed, and some things I thought were great ideas and started that I still couldn’t get to the finish line.

And along the journey, I’ve had nearly every advantage possible to put me on a path to success:

• My Mom gave me access to a computer and some coding books, and I started coding in BASIC at the age of 6.

• My parents were successful entrepreneurs and frequently talked about what was going on in their businesses at the dinner table.

• I started my first software business selling Windows shareware, which I wrote when I was a sophomore in high school.

• As I got further along in my career, multiple people were willing to take a bet on me and invest. Others gave helpful advice along the way.

And yet, I think it wasn’t until just the last ~7 years (after starting HomeSpotter) that I realized some key things I wish I had learned earlier:

1. For prolonged success, it helps if the problem your product is solving resonates with you deeply.

2. Just because you build it doesn’t mean they will come.

3. It is imperative to have a north star and a current plan for where you’re going.

Even with ~15 years prior experience to starting HomeSpotter, my standard playbook had always been:

1. Hey… I wonder if I could build this?

2. Now, I’m making this thing just to see if I can build it.

3. I have a very vague picture of where I’m heading.

4. Wait… I guess I should think about who would buy this now!?

5. Why did I build this in the first place?

I started reflecting on this in part as I’ve been thinking through this process of writing a game app with my son that we hope to monetize.

There is no shortage of courses that teach adults and kids alike to code. But I wish more courses introduced kids to the idea of software entrepreneurship holistically. Such a course might assume that kids would learn about coding elsewhere. It would instead focus on critical things like:

1. How to identify promising ideas to build.

2. How to validate an idea before making it.

3. How to break down a product into manageable parts to be built.

4. How to market and sell a product after it is created.

Fortunately, better resources now exist for first-time technical founders. Y Combinator has made many resources available at large through Startup School. And online forums like Hacker News now exist where technical startup founders can congregate online and share ideas.

While those are great resources, I can’t help but wonder if there isn’t something that could be just a little more approachable for the 8 to 18 year-old crowd.

Mark Rober, an engineer well known for making creative gadgets and walking through the process on YouTube, has a fun course called Creative Engineering: Bring Your Creative Ideas to Life with Science & Engineering. It was impressive how it goes into parts of #1-#3 in my last list above. It doesn’t just prescribe a thing to build and then show how to do that. It forces you to come up with your own idea of what to make after thinking about why to do it in the first place.

Now, if there were just something like that for software entrepreneurship! Had such courses existed when I was a kid, I suspect I would have launched different ventures and gone even further with some of them. This isn’t meant to diminish my successes or minimize my failures. I’m grateful for every experience and live without regrets. However, I am a little curious about how things might have been different if I learned more about product management or simple business concepts like TAM or if I had focused on pre-selling ideas before building them at a much earlier age.

For those of you in and around software, product management, and entrepreneurship … do you know of any good resources for kids? It doesn’t have to be a complete end-to-end course like what Mark Rober has for engineering… It could just be smaller things – like a resource focused on turning an idea into digestible user stories, for example.

Or… if any of you know of someone pursuing this idea further, I’d love to find a way to support it in some fashion. An intro would be appreciated.

This Week’s Quick Hits

• Speaking of kids and entrepreneurship, I love the hustle of my daughter. Last Sunday, she knew she wanted a lemonade stand in the afternoon. And she knew Kate & I would be hesitant, given the extra effort. So, she preemptively created a dozen flyers to hand out around the neighborhood about her lemonade stand. (She’s already got the assumptive close figured out!) It worked… I told her if she could recruit at least one friend to do it with her, that I would help her get the lemonade stand going. She had three friends signed up within a couple minutes. And... her flyers drove sales, too.

• I really enjoyed a recent podcast episode of Norah Jones is Playing Along where she invited Dave Grohl on. Go check it out!

Image by ErikaWittlieb from Pixabay

I’ve been very fortunate to work with some fantastic teams throughout my career. I’m pretty biased, but I’ve been on a several-year streak of making great hires.

You’ll hear a lot of different advice out there in startup land on hiring and firing. Much of it falls into two camps: “Hire Slow and Fire Fast” or “Hire Fast and Fire Fast.”

Unless you’re one of the rare startups that’s blitz-scaling, you probably don’t need to hire that fast. I wish I had known early on how critical it is to be selective and patient in hiring. A mistake I made earlier in my career was letting urgency rule the day on hiring decisions. I would let the apparent pain of not having someone in a given role take precedence over all else.

And yet, “Hire Slow, Fire Fast is Bad Advice.” Basically, it’s not the speed of decision-making in hiring that’s really the issue. The more problematic thing is not taking the time to clearly outline the most important hiring criteria for yourself and your hiring team.

A lack of clarity on what you most need and/or why leads to decision-making where you “just fill the seat.” It doesn’t matter how fast that decision was. It matters that the decision wasn’t based on clearly identified criteria in advance.

To avoid “just filling the seat,” I recommend following Ben Horowitz advice from one of my favorite books, The Hard Thing About Hard Things. In it, he says: “I’d learned the hard way that when hiring executives, one should follow Colin Powell’s instructions and hire for strength rather than lack of weakness.”

To get the whole context behind that, I recommend you read Ben’s book, or the cliff notes on that part of the book here. Ben is saying that hiring decisions often come down to a group of people saying we all like this candidate, we find them agreeable, and we don’t find any significant faults. These “lack of weakness” decisions often fail to deliver what you need in a candidate. Ben advises knowing your top hiring criteria for a position and having those criteria be your primary filter. You need to hire for those strengths, not a lack of weakness.

This Week’s Quick Hits

• It was a fun weekend celebrating my nine-year-old daughter in several ways. She had a dance recital yesterday. She and her dance team did great. She also chose to be baptized today, and it was great to celebrate her and her decision.

Photo by Suchit Poojari on Unsplash

Today, I composed my final HomeSpotter investor update, covering details on the final payments HomeSpotter investors will receive.

This elicits a range of emotions for me, partly because it’s the final update. I feel a sense of finality and, with that, the most minor sense of loss. I’m also grateful to our consistently supportive investor base. I also remember various good times from running the business. Still, in particular today, I miss working with our COO – he and I used to collaborate on these investor updates.

In transparency, in the early days at HomeSpotter, I did a poor job of doing regular investor updates at a consistent frequency. By the end, we got better at committing to getting those updates out quarterly.

I’m on the other side now, occasionally receiving investor updates from companies directly and indirectly through funds I’m invested in. While a small sample size, it’s evident that a few early-stage startup founders have investor updates dialed in, and many leave room for improvement. I hope this post can inspire the next founders to level up their investor update skills.

Why are investor updates important?

Investor updates are critical for maintaining a good relationship with your investors. They help to build trust and transparency. Regular updates also show that you’re committed to the company’s success and take the time to keep your investors informed. By sharing key metrics and milestones, you can help your investors understand how the company is progressing and what areas need improvement.

Another benefit of regular investor updates is that they can help you attract new investors. When potential investors see that you’re actively communicating with your current investors, they’re more likely to see you as a trustworthy and reliable investment opportunity.

How should you approach providing good investor updates?

Here are some tips to help you get started:

1. Set a regular schedule

Setting a regular schedule for investor updates is essential. This helps to ensure that your investors know when to expect updates and can plan accordingly. Whether it’s monthly, quarterly, or bi-annually, make sure to stick to the schedule.

My personal bias is that you communicate with your entire investor base quarterly. It would be best to consider more frequent communication with a small group of your most significant investors.

2. Focus on key metrics

When providing updates, it’s important to focus on key metrics relevant to your business. This could include revenue growth, customer acquisition, user engagement, or product development milestones. Be sure to provide context around the metrics and explain why they’re important to the company’s success.

Presenting information in a dashboard format is most helpful for the most accessible tracking by investors.

3. Be transparent

Transparency is vital when providing updates. Be honest about the company’s challenges and what steps you’re taking to address them. This helps to build trust with your investors and shows that you’re committed to overcoming obstacles and growing the company.

4. Keep it concise

Investors are busy people, so keeping your updates concise and to the point is essential. Don’t overload them with too much information. Stick to the key metrics and milestones, and provide any additional context as necessary.

5. Invite feedback

Inviting feedback from your investors is a great way to engage with them and show that you value their input. Encourage them to ask questions or provide suggestions for improving the business. This helps identify potential issues early on and address them before they become more significant problems.

Summary

In conclusion, regular and informative investor updates are critical for building a solid relationship with your investors. By setting a regular schedule, focusing on key metrics, being transparent, keeping it concise, and inviting feedback, you can approach providing good investor updates in a way that helps to build trust, transparency, and a sense of partnership with your investors.

In contrast, if the only time your investors hear from you is when you’re coincidentally just about to raise another round of funding, they won’t have been able to connect the dots on your progress over the last year. You’ll be way less likely to get their support – monetarily or otherwise.

I say this as someone who’s sat on both sides of the table, and I wish I had done better in the past. Sometimes I didn’t want to provide an update because I didn’t think things were going great. I can see now that such an approach isn’t helpful. Being communicative and transparent in good times and bad is critical to building trust with your investors.

This Week’s Quick Hits

• I watched the Tetris movie yesterday morning… I think it was released Friday night on Apple+. I found the whole story absolutely enthralling. It also brought back great memories of many a Tetris game played. In particular, I played a ton of Tetris 64 with my college roommates. In my humble opinion, this is unequivocally the best version of Tetris ever made. Have you caught the Tetris movie yet? #fortheloveofgames

Photo by Christina @ wocintechchat.com on Unsplash

Several times a year, I get connected to a startup founder who has questions on how to get real estate listing data into their fantastic new real estate app. I have a 5-15 minute response that attempts to boil down the complexities but still misses a lot of nuance and context that could be helpful.

Today’s post is driven by a personal motivation to have a resource to point back to for those conversations. If you’re a newsletter subscriber with zero interest in 3,000+ words on licensing listing data, scroll to the Quick Hits at the end or tune in next week.

For ease of reading, I’ve broken this topic into the following sections:

1. MLSs Defined

2. Standard MLS Data Licenses

3. Non-Standard MLS Data Licenses

4. Listing Data Standards

5. Data Aggregation Companies

6. Other Sources of Listing Data

7. Questions to Ask Yourself Before Starting

8. Key Considerations Based on Those Questions

9. tl;dr Summary

MLSs Defined

Before we talk about listing data or how to license it, it’s essential to know what an MLS is and why it exists. And no, we’re not talking about soccer here. The best definitions of terms like “MLS Organization,” “MLS System,” and “MLS Vendor” can be found in Greg Robertson’s writeup on Vendor Alley entitled “Speaking MLS.” Please go read that before proceeding.

I’ll add one more definition. “MLS Subscribers” are individuals who pay the MLS a membership fee. Membership includes various benefits, the primary one being access to the MLS System. Not anyone can become an MLS Subscriber. This is typically restricted to licensed real estate agents, brokerage firms, appraisers, or other similar entities.

In the US and Canada, there are approximately 650 MLS Organizations, which collectively represent close to 2 million MLS Subscribers. This is down from around 900 when I started in the industry 12 years ago – due to consolidation. And yet… Why so many? Each MLS Organization generally serves all of the MLS Subscribers in a specific geographical area. As a few examples:

• NorthstarMLS serves ~22,000 subscribers around Minneapolis/St. Paul, surrounding suburbs, and now much of greater Minnesota.

• CRMLS (California Regional MLS) serves 100,000+ subscribers primarily around southern California, including LA, Orange County, and many surrounding areas.

• Norfolk Board of REALTORs has an affiliated MLS serving ~100 subscribers near Norfolk, Nebraska.

Occasionally one MLS has little geographic overlap with other MLSs. Rarely MLSs directly compete with each other in the same geographic area. In such cases of overlap, MLSs sometimes opt into data share arrangements with each other. Such data shares allow MLS Subscribers to join only one MLS Organization but see all of the listings near them.

Typical 80/20 power laws apply to MLS Organizations. Of the ~650, the top 50 make up ~50% of listings and total subscriber count, and the top 150 make up ~80% of listings and total subscriber count.

It’s important to know why MLS Organizations exist before you go asking them for a data license. They exist to serve their subscribers. A key way they do that is to provide a means for them to share listings with offers of compensation with each other. In other words, sellers’ agents offer buyers’ agents a specific offer of compensation (e.g., 2.7% of the listing price) if the buyers’ agent brings a buyer for the listing. MLS Subscribers pay a monthly, quarterly, or annual fee for access to an MLS System, amongst other things.

Standard MLS Data Licenses

Most, but not all, MLS Organizations are owned by one or more local REALTOR Associations. This is important because REALTOR-owned MLSs generally have to follow specific rules imposed by the National Association of REALTORs (NAR). NAR requires that their MLSs license data to their subscribers (and their vendors) in at least each of the following ways:

1. IDX (“Internet Data Exchange”). This is the most common/classic method of licensing data. It covers licensing data for brokerage and agent websites (or apps) to publicly display listings to consumers. Such sites generate buyer leads for the brokerage and can effectively show all listings in an area. Typically a third-party vendor powers a white-labeled website or app on behalf of a brokerage or an agent. (Examples: EdinaRealty.com or the Edina Realty app.)

2. VOW (“Virtual Office Website”). A means of licensing data that was institutionalized as part of a 2008 Department of Justice settlement with NAR. Basically, suppose a brokerage puts up a VOW. In that case, consumers may register for more complete access to data than they would otherwise see on an IDX website. Such access is behind a gated login and not publicly available. In such cases, consumers may see information like listings that are now off-market and some additional fields or listings that aren’t available for display under IDX rules.

3. AVM (“Automated Valuation Model”). In 2014, NAR instituted a policy change requiring all MLSs to license data to their subscribers (and their vendors) to create automated valuations. This was partially in response to the Zestimate becoming popular and wanting to ensure that any brokerage could create its own AVM to compete.

4. BBO (“Brokerage Back Office”). New as of a policy change in late 2021, NAR now requires MLSs to provide their subscriber brokers a Brokerage Back Office Feed. This feed allows brokerages (and their vendors) to access all listing data for their own backend data processing needs. Such a path is typically used for cases where the data isn’t displayed to end consumers but may power other backend systems a brokerage needs or uses. (Note: this is a superset of a policy instituted just one year earlier. That policy ensured that MLSs must give brokerages back their own listing data to presumably use however said brokerage wants to. The BBO policy takes this further to include all brokerages’ listings.)

These are the only four paths with which every REALTOR-owned MLS Organization must license its data to its subscribers (and their vendors). Therefore, they represent the only semi-quick/guaranteed path to obtain data from many MLSs at scale.

Each of those four paths has standard paperwork available for it. Many of these are ‘three-party agreements’ that include the MLS Organization, the brokerage, and a technology vendor. As long as the brokerage and technology vendor agree to follow the rules outlined in the agreements, they generally won’t be denied access by the MLS.

Sometimes an MLS requires a technology vendor to go through a pre-approval process before the vendor can sign data access agreements or go live with data.

Sometimes smaller MLSs refrain from talking to technology vendors directly. They require their own subscribers to request data access agreements for their vendors through one of the four paths above. This makes it all the harder for new vendors to make inroads into the industry.

Non-Standard MLS Data Licenses

Most MLS Organizations have additional ways to license their data to others outside the standard four IDX, VOW, AVM, and BBO paths above.

Every single MLS Organization handles this differently. Here’s an example of how ARMLS (Arizona Regional MLS) addresses this in their Content Access Policy (emphasis added as my own):

All individuals and entities that are granted access to MLS Content are required to enter into a Licensing Agreement. At the sole discretion of ARMLS, Agreements may be customized as needed to address circumstances not addressed in the standard agreements.

There are four (4) standard agreements:

A. ARMLS Subscriber Agreement – an access agreement between the MLS and a Subscriber to the MLS Content and MLS System. This agreement is agreed to electronically via the MLS System.
B. Content License Agreement – Participant – a license for access to and use of the MLS Content by a Participant for the purposes of IDX, VOW, BBO or AVM. This agreement will be signed by the Participant and all parties who have access to or will be working with MLS Content.
C. Content License Agreement Brokerage Firm for its own Proprietary Data – a broad license for ARMLS to deliver only the Participant’s brokerage MLS data back to the Participant. The Participant has no contractual restrictions on the use of their own data.
D. Content License Agreement - Vendor – an enterprise license for access to and use of MLS content by a vendor, that allows the vendor to sell a product or products exclusively to Subscribers. This agreement will be signed by all parties who have access to MLS Content.

Bullet (D) above is the primary way a vendor would access ARMLS data outside the standard IDX, VOW, BBO, or AVM paths. You’ll note, however, that ARMLS intended this for use by vendors that want to sell a product or products exclusively to MLS Subscribers. Not for building “the next Zillow.”

Speaking of Zillow, most MLSs have, over time, negotiated bespoke agreements with the likes of Zillow, Homes.com, and REALTOR.com. Such contracts allow these consumer portals to display data directly outside of the standard IDX agreements. (Although Zillow has recently migrated to displaying data under IDX rules over the last two years as it became a broker.)

Listing Data Standards

The Real Estate Standards Organization (RESO) sets standards intended to be used by all MLS Organizations and their MLS Vendors. A Data Dictionary standard is intended to standardize how all MLS Organizations identify similar fields. There is a Web API standard for how to consume data, replacing an older RETS standard being sunset.

I’m glad RESO exists, and I’m happy standardization keeps improving.

It’s also true that even with standards, there is still a lot of variation from a technology standpoint across MLS Organizations and MLS Vendors.

Data Aggregation Companies

A small number of technology companies exist that provide services to other technology vendors to streamline processes around licensing MLS data. These companies’ primary service is to normalize how data is consumed from MLS Organizations and MLS Vendors. They provide a single API or single shared database for a technology vendor, allowing them to avoid learning the nuances of every MLS feed.

The field of what companies provide this service continues to evolve. Constellation 1, Zillow’s Bridge Interactive, and iHomefinder are some examples that come to mind. Other industry mainstays – like WolfNet – have stopped providing such services.

Even when leveraging these companies’ services, a technology vendor still needs a contract with every MLS Organization a vendor needs data from. Sometimes these companies have services to help with that. But that help only goes so far.

Other Sources of Listing Data

Outside of licensing listing data directly from the ~650 MLS Organizations, there are three other options that technology vendors sometimes consider:

1. ListHub. ListHub was the original source for listing data for Zillow and Trulia (before REALTOR.com bought ListHub). ListHub serves as a middleman between an MLS and a Publisher. It allows each brokerage to decide which sites they might want to publish listings to. This is the fastest way for a new entrant to reach a nationwide scale. It has a higher cost than many early-stage startups can absorb (low six figures annually for a national license). It usually requires that new Publishers agree to send generated leads to Opcity. And, due to the opt-in nature, it doesn’t include all the listings in a given area. Some brokerages auto-opt-in to publishing their listings to all nationwide publishers, while others do not. As a result, you will see some areas with very few listings and others with most (but not all) of the listings.

2. Scraping Data. I’m not advocating for this, haven’t done it myself, and my strong advice is – don’t do it. New vendors will nevertheless consider this approach as they’re getting started. Word has it that some of the national portals started out this way. (I can’t say if this is true or not.) But the biggest reason not to do this is that if you display scraped listing photos to consumers, you will get sued. You can look up past lawsuits that companies like NeighborCity were involved in. The long and short of it is that listing photos are obviously copyrighted. If you try to display these without the explicit permission of the listing brokerage (or its MLS Organization or its authorized third party like ListHub), you will eventually get sued.

3. Other Sources. Other companies do exist that will license listing data to other vendors on a near-nationwide footprint, often without listing photos. Sometimes these companies get access to data in an above-board way – by paying MLS Organizations for the data under clearly defined contractual terms. Other times these companies are themselves scraping the data. Often, these companies will expressly prohibit the display of this data on any consumer-facing websites or apps. As such, this may only be a fruitful path for vendors servicing other use cases, like analytics for other parties around the real estate transaction.

New vendors entering the space might do a Google search for something like “Zillow listings API,” and they’ll get optimistic that Zillow provides such a thing. Initial search results are deceiving. Zillow doesn’t provide such an API – or at least not in the way you were probably hoping for. They do have some APIs to get access to rental listing data. And as mentioned in the Data Aggregation Companies section, their Bridge Interactive division offers a streamlined means for accessing a limited number of MLS Organizations’ data. But even that requires a signed contract with every MLS Organization you want to license data from.

Questions to Ask Yourself Before Starting

Some of the questions that will influence which paths are available to you for licensing listing data that you should think about ahead of time are:

1. Will you display listings on a public-facing website or app to consumers without a login?

2. If yes on #1, do you need national coverage (US and/or Canada) quickly for your idea to work?

3. If yes on #1, will the site/app be primarily branded for a brokerage or agent? (e.g. EdinaRealty.com or the Edina Realty app)

4. If yes on #2, is this sold to a national franchise brand, or is it sold to individual brokerages? This isn’t an obvious distinction if you’re new to the industry. For example, there is a critical difference between RE/MAX, the international franchisor, and RE/MAX Results, a large brokerage franchisee in Minneapolis/St. Paul.

5. Are you providing a SaaS product for purchase/use by brokerages/agents?

6. Are you providing a SaaS product for purchase by MLS Organizations themselves?

7. Are you hoping to include listings that aren’t on the MLS? (e.g. rentals, for sale by owner, or other “off-market” listings)

8. Are you hoping to have international listings outside of the US and Canada?

Key Considerations Based on Those Questions

You Want to Become a Nationwide Search App?

If you want to create a consumer-facing nationwide search website or app that isn’t primarily brokerage branded, you’ve got an arduous path ahead. There’s no sugarcoating it.

If you’ve got seed funding, you can jumpstart this path by partnering with ListHub. But you’re long-term beholden to ListHub (owned by REALTOR.com).

Suppose you’ve got a path to a lot of quick venture funding. In that case, you might consider negotiating agreements with all of the MLS Organizations you want data from. However, the path to negotiating such agreements is treacherous. You must convince an MLS Organization’s CEO and Board of Directors that it’s in their collective best interest to license you data. They’re generally too busy to consider this outside one of the four standard paths (IDX, VOW, AVM, and BBO). That’s hard enough to do once with one MLS Organization. Doing it 400-600+ times has only been achieved by a small handful of giant companies that have been in the industry for many years.

In addition to lots of funding, you’ll need to be patient on having lots of ramp-up time, and you’ll need to hire numerous MLS Industry Relations individuals on staff.

Want more certainty, to take less time, and do so for less money? Become a real estate brokerage in all 50 states. That sounds like … a chore that will still take a lot of money. And oh, by the way, you’ll draw the ire of almost everyone in the industry.

The only other path I’m aware of is that apps like Estately seemed to get off the ground by partnering with brokerages. There was an arrangement where a local brokerage sought a data license. Then, there was co-branding between Estately and the local brokerage on their national go-to-market. I haven’t seen many do this, and I have suspicions about why.

You Want to Sell Brokerages or Agents Tools?

Hopefully, your use case fits neatly into the IDX, VOW, AVM, or BBO path. If so, all you need are paying customers! And, patience in filling out paperwork and waiting for credentials with each new MLS you add. And, you’ll also need development time or a Data Aggregation Company to assist you.

This was the path we took at HomeSpotter, and we built connections to 300+ MLS Organizations over our journey. We didn’t work with a Data Aggregation Company, mainly because we wanted to control our own destiny.

Suppose, for some reason, your use case doesn’t fit into the IDX, VOW, AVM, or BBO boxes. In that case, I’d encourage you to reconsider how to adjust your service to make it fit into one of them. Especially now that BBO is a more universal option within the last year.

You Want to Sell to MLS Organizations?

If an MLS Organization buys a service from you to provide a “Member Benefit,” they’ll typically give you their data at no additional cost to fulfill the service. Just be prepared for really long sales cycles.

You Want to Sell to National Franchisors?

Cool. I have so much to say about this, but I’m already at 3,000+ words. For today, I’ll just say, start by selling tools to brokerages or agents, show some demonstrated successes, and then some other day I’ll bore you with all of the MLS rules compliance issues that working at a national franchise level introduces.

You Want to Include Non-MLS Listings?

Most MLS Organizations do not allow co-mingling non-MLS listings with MLS listings. Where you source these other listings is outside the scope of this post.

You Want to Do This Outside of the US and Canada?

The international real estate market is almost entirely different than what we have in the US and Canada. In general, the seller doesn’t pay a buyers’ agent commission. Therefore, there often aren’t buyers’ agents at all. Without this fundamental business model in place, MLS Organizations also don’t exist internationally in the same way they do in the US and Canada. If you’re curious, Australia seems to have the most robust listing portal market outside North America.

Most residential real estate technology companies solve for the US and Canadian markets, or they solve for international markets. They rarely do both due to business model differences.

tl;dr Summary

Licensing listing data and scaling to a nationwide footprint is really, really hard. There are proof points in the market that show it can be done. But hopefully, the long writeup above allows you to go in with eyes wide open on what it will take.

This Week’s Quick Hits

(If you showed up to read about licensing listing data, these quick hits have nothing to do with that topic. They’re just random thoughts appended to the end of my weekly newsletter.)

• I switched to using Arc browser earlier this week. It will be a more significant productivity boost in total for me than Superhuman was for email. I have a limited number of invites remaining. Hit me up if you want one.

• My son’s First Lego League team made it to state yesterday and also won an award for their innovation project. This is the second year in a row my son has gone to state. I’m so proud of him. This year, I’ve been more actively involved as an assistant coach, often helping his team two days a week. First Lego League is doing such a good thing for grade school kids. Beyond coding and problem-solving, it also helps them to work on presentation skills. I’m so grateful for my son’s teacher/coach, who has gone above and beyond to invest in the kids.

Photo by Cytonn Photography on Unsplash

A different version of this idea crossed my mind in the month leading up to the acquisition. I considered sending a handwritten note of thanks to many of the people I was grateful for on the journey. Immediately before and after the purchase, though, I was swamped. And as 2021 progressed, I didn’t see a conceivable way to make this happen.

However, as Thanksgiving 2021 hit, the notion that I ought to do something re-sparked. That’s when it dawned on me that a post on LinkedIn publicly giving thanks to each individual could be more impactful than a handwritten note. What better way to recognize someone professionally than in front of others? I also realized that while I couldn’t commit to one big burst of writing 100 notes in a weekend, the idea of committing to writing one a day was straightforward.

I wrote an initial post outlining this on November 30. I publicly committed myself to do this without any other days pre-written. And I quickly adopted the hashtag #givethanks100. I had started a spreadsheet of many people I wanted to track, including things like:

• Relation: advisor, colleague, connector, customer, employee, family, friend, investor, or vendor

• Target/Actual Post Date

• Dependencies: if someone introduced me to someone else and I was thanking both, I wanted to tie them together across posts

I spread the individuals across target post days by giving everyone a random number. I then made adjustments to mix up the kinds of relationships with people I wrote about each week. And I did some final manual overrides.

The next day, I started with a post about Kate. I got a little teary-eyed.

From there, I just kept at it. Some weekends I would pre-write much of the following week’s posts. On other weekends I didn’t get any done ahead of time. I gave myself the flexibility that I didn’t need to post at a set time every single day. Some nights it was pretty late. For others, it was before 7am. I didn’t want to break the chain.

One of the big surprises to me along the way was how many people were paying attention. Some posts had upwards of 4,000 impressions on LinkedIn. Still- that felt abstract and semi-arbitrary. The more significant thing was the number of long-term acquaintances I’d bump into who said they were reading many of the posts and thanked me for what I did. And an article on my project was written in the Star Tribune.

I wrapped up my posts after four months on March 31 with a post about my kids, Eli and Adeline. I once again got a little teary-eyed.

In this season of thanks, I hope we can all reflect on the opportunity to thank those who contribute to our success. One of the things I still need to work on is giving thanks along the way. While this #givethanks100 project was nice for what it was, I’ll admit I often lose sight of the opportunities to celebrate the team’s contributions as they happen. I’ll commit to working on that as we bring in the new year.

Thanks again to the employees, investors, family, friends, and others who impacted me on the HomeSpotter journey. Check out some of their stories here: homespotter.givethanks100.com. Some can’t-miss ones in pseudo-chronological order include Mom, Dad, Grandpa, Ed, Mike, Brian, Nate, Mark, Mark, Amanda, Abby, Devin, Evelyn, Tony, Sarah, Neil, Aaron, Kaitlin, Dug, and Tim.

Photo by Jon Tyson on Unsplash

We paused running a structured process for finding a growth investment partner or strategic acquirer mid-COVID. In the midst of that, I started to pursue in earnest finding a similar-sized company that we would seek to acquire and effectively “package up” as part of a broader PE investment deal. 

I compiled a database of 700+ proptech companies. I evaluated various factors:

1. How complementary their services were to ours.

2. How much overlap in customer base we had.

3. How much money they had raised.

4. How much annual revenue I estimated they were generating (by looking at their number of employees as a proxy).

After all of that analysis, the company that stood out as a top fit was W+R Studios. I had assumed they would be a great fit, as I had already been building a relationship with Greg and Dan, hoping we might join forces one day. I reached back out, and there was mutual interest in exploring the concept of going to market together. But those talks quickly subsided. A would-be acquirer had approached them, and they needed to curtail discussions. 

Less than two months later, in December 2020, Lone Wolf’s acquisition of W+R Studios closed. With my favorite off the table, I continued the search for other potential companies to acquire and identified several good options. But, the number of “great” opportunities for us was shorter than I would have hoped.

With that backdrop, Lone Wolf reached out to us in late January 2021. It wasn’t something I had expected or pushed for. (Special thanks to Greg, Graeme, and Chris at Lone Wolf for their separate parts in contributing to us being on the radar for that initial outreach.) They weren’t at the table in our prior process, so it was a fresh start. I assumed they weren’t serious about us, and I wasn’t sure I was interested either. However, in late February, I was prepped to do a demo for two people for Lone Wolf’s C suite. I was pleasantly surprised when about a dozen people showed up. They were serious. 

From there, things flew by. We signed a letter of intent on March 25, 2021, and closed a short 46 days later. 

How did I transition so quickly from wanting to raise a growth round to deciding instead to get acquired? The trite answer might be that it was about the money, and they made a good offer. 

While true, there were many other reasons. The process of intentionally looking at who else we would buy and seeing the path toward future growth had me believing that that would be a long road. Also, I have been predicting a recession since 2016. While I had been consistently wrong for ~5 years, I knew a recession was inevitable. And 2020 was a rollercoaster of a year. We navigated it well, but I could sense our team was tired. I wasn’t sure we were collectively excited enough to continue to pursue the independent path for another 5+ years. 

In addition, the fact that Dan and Greg chose to sell to them was a significant endorsement. Moreover, I liked my interactions with the Lone Wolf leadership team and the vision of where they were heading. I saw the opportunity to build out the end-to-end platform we had always envisioned as an eventuality at HomeSpotter.

Most of all, my kids were getting older, and I wanted to make sure I would be available in a more meaningful way. I had some friends drive home this idea that you only have “x more vacations” with your kids before they leave the house, and that time is fleeting. I wanted to be more present. 

That particular reason made for a more interesting journey immediately after signing the letter of intent to sell. My family and I had been itching for a vacation mid-COVID. After having various plans thwarted, we had long scheduled a two-week RV trip to start on March 27 - two days after I signed that LOI. It was set to be a trek through some fantastic national parks in Utah, Arizona, and New Mexico. Though we would consider ourselves “indoorsy,” we were excited about this adventure.

The thought of canceling the trip crossed my mind briefly, but I didn’t seriously entertain it. I didn’t want to let my family down. 

But I also didn’t want to jeopardize the deal or convey that I was any less committed to a timely close. So, I never mentioned I was in an RV to my new colleagues at Lone Wolf. I took many due diligence meetings hunched over a laptop on the side of the road or in some other temporarily contrived office setup. I booked two separate hotel rooms along the way - not for us to stay in but for me to have a reliable place to take Zoom calls from. I also rented a car for a day for the same reason. 

One of the hardest-fought lessons I’ve learned over the last few years is that work-life integration is far better for me to aspire to than work-life balance. 

When you’re aiming for work-life balance, work is seen as a negative chore that steals from the rest of your life and priorities. You treat work as a 9 to 5, and then it is out of sight, out of mind. It doesn’t acknowledge the reality that sometimes you must sprint for a season to achieve a goal or that sometimes entrepreneurs dream up their best ideas off hours. 

On the other hand, when you aspire to work-life integration, you focus on trying to be present in each moment and live it to the fullest. You might work in the evenings after your kids are asleep, but also take some time off work in the middle of the day to pick them up from school. You also acknowledge that life is messy.

I’ve found having guidelines for myself that I adhere to most of the time makes it easier if I need to break them, provided I’m communicative. For example, I try to keep my phone off when we are together as a family - especially over dinner. But once in a long while, I get home and have an urgent issue to deal with for work. I acknowledge it with the family and work through dinner. The keys are being intentional and communicating well.

Or, when we take a vacation, I often get up an hour or two before everyone else, knock out what I need for work, and then do my best to stay off my phone the rest of the day with the family. 

This approach may not be for everyone, but I wouldn’t have it any other way. 

And as you can see below, we managed to have the vacation of a lifetime and enjoyed every minute of it … and the deal closed on time too!

Having just hit the eighteen-month anniversary of the sale, I have no regrets and many positive things to say about the decision to join Lone Wolf. I am also glad I didn’t forego the opportunity to take this epic trip.

Special thanks to many HomeSpotter colleagues and advisors for supporting my time away and our collective due diligence efforts.

I didn’t realize it, but prior experiences had primed me for this mentality. We sold the first startup I co-founded about three years after founding. I stayed at the acquirer for three years. Immediately after I left, I built a Facebook game. I sold it to a venture-backed company a short four months later. I had naively assumed this was the pattern I’d continue to follow throughout my career.

Shortly after that, I had an experience that nearly validated this assumption again. A co-founder of another venture and I were approached about that company getting acquired as well. The offer was generous, considering we hadn’t raised money and hadn’t demonstrated much traction yet. We quickly signed a letter of intent. And yet, the potential acquirer backed out several months later. It was pretty devastating at the time. I was rather sour about the legal bills we amassed too. Ultimately, it became a big demotivation to continuing on with that venture. 

With years of distance, I’m grateful for having gone through this. I would never again assume a deal was done until it was done, which proved beneficial at several points in the HomeSpotter journey.

In our first significant wave of growth at HomeSpotter, periodically, would-be acquirers would approach us. I was cautious about each interaction. But most of those conversations quickly fizzled out because we hadn’t yet grown into my valuation expectations.

Late 2015 through 2017 was a challenging time. Growth flatlined on our first product, and I had to pivot and find a path forward. During this time, I had many moments of despair – wondering if we’d even grow back into the initial valuations we had raised at. I didn’t want to disappoint my investors. Frankly, I felt stuck.

Several very respected people (investors, prominent industry consultants, etc.) told me I should pursue a fire sale during that time. They saw the flatlined growth on our first product and thought I was wasting my time. Fortunately, I was stubborn and unwilling to settle. Seven years of pain, substantial portions of which were unpaid or underpaid, for what might have been little to no return to me personally didn’t seem worth it.

And ultimately, we made the right bet on choosing our second product to pursue. Significant growth started again, and we sold on favorable terms several years later.

As we were amid that growth, I allowed us to get partially distracted by an interested party for six months. Our new product’s technology was intriguing as a potential path for this party to scale their business. We partnered on a pilot project, which I believed had a trifecta of ideal attributes:

1. We were getting paid to learn and potentially improve our technology.

2. Beyond the interested party, the project was in service of one of the biggest firms in our space which could lead to bigger and better things.

3. There was a strong chance we would be acquired if the pilot was a raging success.

Instead, much of our staff and my time was diverted into what looked more like a services engagement. It was a good lesson on opportunity costs. Fortunately, we never got to the point of a term sheet allowing us to avoid the frustration of wasted legal fees or dashed dreams. And as it turns out, we were able to deepen our relationship with that other big firm in the space on our core products, so not all was lost.

At some point, I realized we would need to get bigger to be a more ideal acquisition target and drive a higher multiple. I closed an acquisition of another company in early 2019, making us a three-product company. At least a couple people that knew me thought this was counter-intuitive. “I thought you wanted to sell... buying another company seems to be going in the opposite direction?”

We were on a path for that bet to pay off. In late 2019, we retained an investment banker. We took a dual-track approach where we would consider raising money from private equity in a majority recap transaction or an outright sale to a strategic acquirer. While I had previously only considered selling, I had reached a point where raising a growth round from private equity seemed more appealing. Such a partnership would allow us to acquire other companies and drive up our revenue, profitability, and valuation multiple. And, if I could take some chips off the table at the same time, all the better.

We spent several months getting our CIM (confidential information memorandum), data room materials, and teaser decks ready to hit the road. We formally launched our process in late January 2020. We had lined up about a dozen interested parties, many of which were private equity firms and a few strategics. With confidence in our prospects, we set a bid date of March 13, 2020.

In case you’ve conveniently forgotten, the week of March 9, 2020, will forever be imprinted on my mind. The NBA shut down. Tom Hanks got COVID. The stock market was in freefall. Many were panicked about all the unknowns. And we went from a dozen parties that suggested they would put in a bid to none putting in a serious one literally overnight.

We quickly paused our process due to market conditions. Our attention shifted to weathering the storm in front of us. The whirlwind year of weathering that storm will be a topic for another day.

So that’s my brief walk down memory lane on potential acquisitions that weren’t meant to be.

In my career, I’ve been through many completed acquisitions now on both sides of the table. And yet, when I start something again, I will think far less about an exit strategy and far more about founder-market fit and being in it for the long haul. If I take a venture-backed path, I’ll be much more focused on TAM (total addressable market) than in the past. And if I take a bootstrapped approach, I’ll be much more focused on the path to profitability and positive cash flow.

Please tune in next week for my post on how our acquisition came together expeditiously and unexpectedly. Ironically, it was at a time I wasn’t pursuing a sale.

Special thanks to HomeSpotter investor Scott Burns for numerous conversations over the years on potentially pursuing a growth round of funding from private equity. The discussions were timely and productive.

Photo by DDP on Unsplash

In a hurry? Scroll to The tld;r at the bottom.

In March 2010, I went to the Minnesota Secretary of State’s website and registered MobileRealtyApps.com, LLC as a Minnesota limited liability company. I made two mistakes that day. One I corrected and one I didn’t.

If I knew then what I know today, I would have registered a Delaware C corporation* at the start.

So, why did I choose a Minnesota LLC in the first place? Contrary to an oft-stated opinion, no one gave me bad legal advice. I chose this path myself. But it also wasn’t a decision made with complete naivety either. I had two prior life experiences that suggested this was absolutely the right path to take!

First, in 1997 my parents sold their manufacturing business of 15 years, and ultimately they regretted that they held a C corp. When they sold, their acquirer required that it be an ‘asset sale.’ In such scenarios, which are pretty standard in many corporate M&A transactions, an acquiring entity buys the assets from another entity. Still, it does not buy the actual corporation itself. There are several legal and accounting reasons that acquirers prefer this. As a result, my parents were hit with double taxation. The C corp. had to pay corporate taxes on the gain from selling its assets. Then when the company distributed the proceeds to my parents, they had to pay a dividend tax. Such double taxation seemed unreasonable to me. And I heard similar stories from other business owners in the years that followed, so this wasn’t an isolated instance.

Second, in 2004, we sold AltonaEd, LLC (a business I co-founded) to Pearson Education. It was also an asset sale, but it was passed through as a long-term capital gain to me on a K-1. I was taxed once! I thought it was the greatest thing ever.

With those prior life experiences, what more did I need to learn? As it turns out – a lot. Tax law is constantly changing, and my new venture was different enough from the scenarios I had seen in the past.

I corrected the horrible branding mistake and rebranded MobileRealtyApps.com as HomeSpotter in 2015. But I could have taken various opportunities to correct my other early mistake and convert the LLC into a C corporation, and I never did.

Here are seven reasons I should have chosen a Delaware C corporation from the start (or converted to one along the way).

First, many seasoned investors will only invest in Delaware C corporations. I wasn’t thinking about raising money in 2010. And there’s a significant reason VCs and angels don’t want to invest in an LLC. C corporations are responsible for their taxes and tax filings. In contrast, LLCs are pass-through entities whose taxes get reported on their collective owner’s taxes.

If you invest in an LLC, you can’t really file your own taxes accurately until you receive a K-1 from the LLC each year so that you know what you have to report on your own return. While that’s unfortunate for angels, most angels already have a complex tax situation and file for an extension each year. It is inconvenient but not a showstopper.

It is utterly disruptive to VCs, however. Each VC fund is responsible for issuing K-1s to each of its many limited partners. VC funds are therefore prevented from distributing their K-1s on a timely basis until they have received all of their portfolio company K-1s (if they have them). As a result, most VC firms refuse to invest in LLCs, as C corporations do not have to issue K-1s.

If you’re lucky, a VC will state on their term sheet that you must convert to a Delaware C corporation before closing their investment. If you’re less fortunate, they won’t take you seriously. It can be such a negative signal that you may not even have the opportunity to discuss their potential investment. They will assume you are not serious about growing a venture-scale business or are getting bad advice.

Second, rewarding your employees with equity is unnecessarily complicated and less advantageous to employees in an LLC. Since LLCs have “units” and not “stock,” things like stock options and restricted stock units aren’t available in the same way they are in a C corporation. We got around this by creating an “equity appreciation rights plan,” which is sometimes referred to as “phantom stock.” I was proud that it had some aspects that were employee friendly, like the fact that employees could keep what they vested if they left and not be forced to pay in and buy stock within 90 days. However, I later learned that our equity appreciation rights plan had disadvantages for the employee and the company. Namely- employees had to be paid their gains via payroll. This meant that both the employees and the company had to pay payroll taxes that wouldn’t have been due if they were capital gains – as they would’ve been with stock options or RSUs. Some of these issues we experienced may have been specific to our plan. Still, generally, there is a more straightforward path with C corporations.

Third, distributing those K-1s each year is unnecessarily painful. It may seem trivial, but the March 15th deadline comes quickly every year. Getting your investors a timely K-1 is more challenging than you might envision. There were often unforeseen complicating factors that delayed the prompt distribution of K-1s. While I was fortunate to have a very understanding set of investors for HomeSpotter, it was never a good feeling having to communicate any reason for a delay.

Preparing and distributing the final year K-1 after the acquisition was particularly onerous. Although we managed to get the K-1s out before the deadline, many investors had questions that needed to be answered due to the nuances of partnership tax law.

Fourth, acquisitions may become unnecessarily complicated with an LLC. In 2019, we acquired a Canadian company, Spacio. The deal we agreed to included a combination of cash upfront, an earn-out, and equity in HomeSpotter. We had to jump through many hoops to effectively issue equity in HomeSpotter to Spacio’s co-founders without creating an undue tax burden on them. This complexity could have been completely avoided if we were a C corporation. Moreover, challenges with reporting across our US and Canadian entities post-transaction led to delays in the timely distribution of K-1s to our investors.

Fifth, and most important to me personally, in an LLC, you lose the opportunity to take advantage of Section 1202 QSBS tax exemptions. QSBS was codified in the tax law in 2010, allowing those holding shares in companies that meet specific criteria to be completely exempt from paying federal capital gains tax (up to specific limits). Many states honor QSBS, and you may be exempt from paying state capital gains as a result. To be eligible for the QSBS exemption:

1. The company must be a C corporation.

2. The company must have assets of less than $50 million at the time of the equity issuance and immediately thereafter (including cash received from the issuance).

3. The company must be a qualified business. Most tech startups should qualify.

4. The equity must be stock. Convertible notes, warrants, and stock options don’t count.

5. The equity must be held for at least five years and the business must be an active business for the duration of the investment.

It was painful to write the most significant check of my life to the IRS, knowing that had I done just one thing differently early on, I wouldn’t have had to pay anything. I’m not looking for anyone’s sympathy, as it’s a first-world problem of the best kind. I don’t live with regret, but I occasionally wonder what productive things I could have done with all that additional cash.

This QSBS exemption applies not just to founders but to any investor in the company as well, provided they held for five years. So, collectively, my investors also had big tax bills that could have been avoided with this simple change.

I recommend that anyone who takes a serious look at angel investing become well-versed in QSBS exemptions. I’m told there are additional opportunities to leverage QSBS. Suppose you have a company sell before the five-year holding period, and you take the proper steps. In that case, you can roll the investment into a new one, delay paying capital gains and decrease the holding period required to use QSBS on that next investment.

Sixth, the double taxation of asset sales in C corporations is essentially a thing of the past. Acquirers in many M&A transactions still prefer buying a corporation’s assets instead of all the outstanding stock. The corporation will likely need to pay corporate income tax on the gains. However, the shareholder(s), when they receive the remaining sale proceeds through a liquidating dividend, can use the same Section 1202 cited above to avoid tax on that cash. Also, I’m told that most tech/software acquisitions are stock deals, not asset deals. So, this concern likely won’t apply to you, regardless.

Seventh, incorporating in Delaware could save you numerous headaches and increased legal fees down the road. Having a Minnesota LLC slowed us down and added time (and, therefore, legal fees) during the acquisition because our attorneys had to clarify nuances of Minnesota law with the acquirer’s counsel.

In the context of privately financed companies, Delaware law, in most circumstances, honors the contractual arrangements among stockholders (both founders and investors) as they are written without the threat of a court imposing additional “minority stockholder rights” if someone later decides they don’t like the deal. Under many state corporate statutes, a stockholder can assert these rights arguing they have been unfairly treated or “oppressed” in a broad sense. Such lawsuits (and the threat of them) among founders have destroyed many startups before they even get going. Delaware law limits this risk for everyone. Also, Delaware chancery courts have a broadly understood system for settling corporate conflicts efficiently and don’t allow for jury trials.

Additionally, most priced venture capital financings are done using forms (maintained by the National Venture Capital Association and seriesseed.com) that presume the company is registered in Delaware. While the forms can be adjusted for use with any state, this is an immaterial issue that then needs to be negotiated. The lawyers need to get comfortable with another state’s corporate law, resulting in increased legal costs for the company’s finance work.

Registering in Delaware barely adds additional overhead, so you might as well do it from the start.

So, knowing all of the above, why would a founder choose an LLC or S corporation? If you: a) have a very profitable cash-flowing business or conversely have a business losing money and want to use the losses to offset other personal income, and b) never raise money from VCs, and c) plan to never sell or have a business in an excluded category for QSBS – then an LLC or an S corporation might be the right choice for you. As a business owner, you will avoid double taxation.

But, please heed my warning: if you plan to raise angel or venture capital or sell for a significant outcome, stick to a Delaware C corp. You will be glad you did.

Finally, if you’re a founder about to raise venture capital and have already set up an LLC, don’t fret. This is easily fixable. I recommend proactively converting to a C corporation before talking to VCs. Talk to a good lawyer, and choose one that focuses on tech startups only. If you can’t get this done pre-raise, then at least be proactive in telling investors that you are in the process of converting before closing a round. Whatever you do, don’t say you will convert “if investors require it.” That may signal you’re not serious about raising venture capital or don’t know what you are talking about.

* Someone will inevitably read this, get pedantic, and say that how a company elects to file its taxes and the form and location of incorporation are two totally separate things. (e.g., You could theoretically have a Minnesota LLC file its taxes as a C corporation through a simple IRS election.) Filing to incorporate in Delaware is separate from your filing with the IRS, which designates how you want to be taxed. I nevertheless refer to a Delaware C corporation throughout and recommend you not get cute with this. Register a corporation (not an LLC) in Delaware. Elect to be taxed as a C corporation with the IRS.

The tl;dr

• HomeSpotter was a Minnesota LLC, and I highlighted several reasons I should have formed a Delaware C corp.

• Some companies (lifestyle, strong cash flow, non-qualified businesses) avoid double taxation for their owners by choosing to be an LLC or S corp.

• However, HomeSpotter’s LLC structure created operational challenges along the way and resulted in paying higher taxes when we sold.

• Founders and investors can minimize federal capital gains taxes when selling through QSBS. To take advantage, the company must be a C corp., the stock must be held for at least five years, and a few more critical conditions must be met.

• Nearly every venture-backed business is a C corp. Raising venture? Stick to a C corp. from the start.

• Form that corporation in Delaware to avoid unnecessary challenges down the road.

• If you formed an LLC and are about to raise a venture round, don’t fret. This is fixable.

• Seek a competent startup attorney and CPA, and don’t take my advice alone.

Special thanks to HomeSpotter’s M&A counsel, Chris Carlisle, and HomeSpotter investors Daren Cotter, Casey Allen, Scott Burns, and Rob Weber for reviewing an early draft of this post and providing feedback.